Macro1_PS2_solutions3

Macro1_PS2_solutions3 - Macroeconomics 1. Master APE....

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Unformatted text preview: Macroeconomics 1. Master APE. 2010-2011. PS2 Prof. Xavier Ragot / T.A : Eric Monnet 1 Optimal choice of monetary instruments in a simple stochas- tic model : money versus interest-rate targeting Suppose the economy is described by linear IS and LM curves that are subject to disturbances 1 : y = c- a.i + IS m- p = h.y- k.i + LM where IS and LM are independent, mean-zero shocks with variances σ 2 IS and σ 2 LM , and a, h and k are positive. Policymakers want to stabilize output, but they cannot observe y or the shocks. Assume for simplicity that p is xed (as in traditional IS-LM model). 1- suppose that the policymakers xes i at some level ¯ i . what is the variance of y ? When the policymaker xes i , the LM curve is irrelevant. Equilibrium output is determined by the IS curve and the xed nominal interest rates, i . Substituting i into the IS curve yields : y = c- a ¯ i + 2 IS The variance of y is simply var ( y ) = var ( IS ) = σ 2 IS 2- suppose that the policymakers xes m at some level ¯ m . what is the variance of y ?...
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This note was uploaded on 01/12/2011 for the course ECO 010023 taught by Professor Mrraggillpol during the Fall '09 term at Paris Tech.

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Macro1_PS2_solutions3 - Macroeconomics 1. Master APE....

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